FAQ: With all of the recent changes related to COVID-19, what are an employer’s choices related to a health FSA and dependent care FSA?

June 23, 2020

The IRS has recently released several notices and regulations related to the administration of health FSA’s and dependent care FSA’s. This article will summarize that guidance.

One of the changes is mandatory in the sense that an employer does not have a choice. The change must be adopted. The period of time that a health FSA participant has to submit already incurred claims has been extended. This is generally called the run-out period. If the end of the run-out period occurred on or after March 1, 2020, then participants have additional time to submit qualified claims that were incurred during the plan year or grace period. The deadline is suspended until the end of the National Emergency is declared plus 60 days (called the Outbreak Period). This does not apply to a dependent care FSA.

Then there are the optional changes. First, the sponsor of a health FSA or dependent care FSA that had a grace period or plan year end in 2020 may choose to implement an extended claims period. Participants would have until December 31, 2020, to incur claims. This gives participants a chance to spend down any balance that was remaining in their account at the end of the plan year or grace period. It’s considered an extension of the grace period. An employer may choose to adopt this optional provision for a plan that has a grace period, rollover or neither. Importantly, an employer that also sponsors an HSA should understand that adopting the extended claims period for a health FSA would result in participants being ineligible for HSA contributions during that period. If adopted, the employer must revise their Section 125 written plan document by December 31, 2021.

Let’s go over an example:

Tommy’s Brake Pads sponsors a health FSA that runs from January to December with a two and a half month grace period. The most recent plan year ran from January 1, 2019, to December 31, 2019, with a grace period ending March 15, 2020. Typically, employees have until March 15 to incur claims and until March 31 to submit claims. Under the new guidance, the plan cannot enforce the March 31 claims deadline. Participants have until 60 days following the end of the Outbreak Period to submit claims. Additionally, Tommy’s Brake Pads may choose to allow employees with a remaining balance to incur claims through December 31, 2020.

Second, employers may choose to allow employees to make changes to their health FSA or dependent care FSA without a qualifying event. Typically, a participant may not change their Section 125 election mid-year without a qualifying event. Through December 31, 2020, employers may permit employees to add, increase or decrease their health FSA or dependent care FSA election amount. The employer may limit the changes to a certain timeframe. For example, the employer may choose to allow such changes only during the month of July. The employer may also limit the types of changes permitted. For example, the employer may allow only decreases to election amounts, not increases or adds. (Keep in mind, though, that changes could still be allowed under the regular qualifying event rules if an employer doesn’t choose to recognize an additional qualifying event opportunity.)

Whatever choices are adopted by the employer, they should be clearly communicated to employees.

For a summary of many of the mandatory and optional changes employers must or can make, see our quick reference chart.